Amidst the decline in foreign-exchange reserves, Fitch Ratings which last week downgraded Sri Lanka’s sovereign rating to ‘B+’ says the island’s reserve coverage of current external payments is now forecast to fall to 2.9 months in 2016 from an estimated 3.4 months in 2015. According to the rating agency, this forecast compares unfavourably with Fitch’s earlier forecast of 3.9 months for 2016 and is well below the ‘BB’ median of 4.2 months.

“While the authorities have undertaken certain measures to support external finances, including entering into bilateral swaps with other central banks, Fitch does not view this to be a sustainable way to improve the stability of the external finances,” the agency noted in a statement.

Noting that Sri Lanka has also increased its issuance of foreign currency debt, Fitch said that estimates now makes up close to 46% of total public debt, up from nearly 42% at the end of 2014.

“This has increased vulnerability of Sri Lanka’s public debt to a significant depreciation of the exchange rate, which would increase the debt burden in local currency terms,” the agency further pointed out.

Fitch has also noted that the Sri Lankan sovereign faces increased refinancing risks on account of high upcoming external debt maturities. Further, the sovereign’s external liquidity position remains strained, reflecting pressure on foreign exchange reserves.

“In Fitch’s view, this partly reflects a weakening in policy coherence that increases the likelihood of Sri Lanka requiring external liquidity support from the IMF and other multilateral institutions. Sri Lanka’s external liquidity ratio, as measured by Fitch at the end of 2015, was 70.9%, which is far below the median of ‘B’-rated peers’ of 171.9% and the ‘BB’ median of 152.4%,” Fitch added.